1. The Theory of Production
Chapter 5 : Lesson 2
The Theory of Production

2. Essential Question:
How do companies use the stages of production to determine the most profitable number of workers to hire?

3. Production Function: graphic portrayal showing how a change in the amount of a single variable input affects output

4. Total Product: total output or production by a firm

5. Marginal Product: extra output due to the addition of one more unit of input

6. Stages of Production: phases of production that consist of increasing, decreasing, and negative returns

7. Marginal Product Curve14
Increasing
marginal
returns 12
Diminishing
marginal
returns
Negative
marginal
returns 10 8 6 4
Garages per Year
MPP in 2 –2 –4
MPP –6 1 2 3 4 5 6 7
Number of Carpenters

8. Law of Diminishing Returns
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Total Product, TP
Increasing
Marginal
Returns
Quantity of Labor
Average Product, AP, and
Marginal Product, MP
Average
Product
Marginal
Product
Quantity of Labor

9. Law of Diminishing Returns
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Total Product, TP
Diminishing
Marginal
Returns
Quantity of Labor
Average Product, AP, and
Marginal Product, MP
Average
Product
Marginal
Product
Quantity of Labor

10. Law of Diminishing Returns
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Total Product, TP
Negative
Marginal
Returns
Quantity of Labor
Average Product, AP, and
Marginal Product, MP
Average
Product
Marginal
Product
Quantity of Labor

11. Diminishing Returns: stage of production where output increases at a decreasing rate as more units of the variable input are added

12. Short Run: production period so short that only variable inputs (usually labor) can be changed
a period of time during which some of the firm’s cost commitments have not ended.
In the short run, output can change but some resources are fixed. Generally, the fixed resources are plant size and capital.

13. Long Run: production period long enough to change amount of variable and fixed inputs used in production.
a period of time long enough for all of the firm’s cost commitments to come to an end.
In the long run, all inputs can be varied.

14. Total Product (TP) Marginal Product (MP) Average Product (AP)
SHORT-RUN PRODUCTION
RELATIONSHIPS
Total Product (TP)
Marginal Product (MP)
Marginal Product =
Change in Total Product
Change in Labor Input
Average Product (AP)
Average Product =
Total Product
Units of Labor

15. Total Product for Al’s Building Company
Find the Average Product at each level of output.
Find the Marginal Product of each additional carpenter.

16. Al’s Product Schedule

17. Total Product with Different Quantities of Carpenters40 F 35 TP E 32 G 30 25 D
Garages per Year
Total Output in 20 15 C 10 B 5 A 1 2 3 4 5 6 7
Quantity of Carpenters
per Year

18. Review Question:
Chapter 5 : Lesson 2
Read pages and answer Review Questions on page 139. Hand in Google Class Room.